As one might expect during these rapidly changing times, we have been in communication with higher education institutions across the country regarding the impact of the novel coronavirus (COVID-19) on institutions’ operations. Topics discussed range from business continuity issues, human resources and payroll matters, logistical and operational concerns, and tax matters. All of these topics and more are covered in detail at Baker Tilly’s Coronavirus Preparedness Resource Center, including a dedicated Higher Education Coronavirus Preparedness site. In addition, we have been asked several questions regarding accounting matters, which are addressed in this communication.
To ensure our responses are in line with the broader accounting industry, we consulted the AICPA Technical Hotline who affirmed that the responses below are in line with the appropriate authoritative guidance.
Question #1: How should higher education institutions account for refunds of tuition, fees, room, and board?
Answer: Under ASC 606-10-32-42 and 606-10-32-43, after contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services. An entity shall allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in standalone selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
Commentary: As a practical matter, many institutions have continued instruction online or in some other remote capacity, and may conclude that performance obligations related to tuition and certain fees can still be satisfied. Therefore, revenue may continue to be recognized as these performance obligations are met. However, in situations where students who paid to live on campus and who purchased a meal plan for the spring semester are unable to fully utilize the promised goods or services (i.e. housing and meals), no revenue may be recognized for the unused portion.
Question #2: How should institutions account for cash retained and applied to a future term (i.e. Fall 2020) in lieu of cash refunds?
Answer: Similar to Question #1, amounts should be netted against revenue in the current period and recorded as a contract liability until the related credits are utilized.
Commentary: When refunds or credits are applied to a student’s account and generate an overall credit balance, note that requirements to return Title IV federal aid related to these credit balances still apply. For a more in-depth discussion of the impact of COVID-19 on Title IV aid, please refer to this link.
Question #3: How should incremental costs associated with coronavirus remediation (i.e. cleaning and supplies; temporary housing; emergency preparedness; etc.) be shown in the statements of activities and functional expenses?
Answer: Under ASC 225-20-45-16, a material event or transaction that an entity considers to be both unusual in nature and occurs infrequently shall be accounted for separately. Therefore, a line item within the statement of functional expenses and included in expenses as a component of change in net assets from continuing operations shall be reported separately, if material, or disclosed in the related notes.
Commentary: While these costs are certainly unusual and hopefully non-recurring in nature, the accounting guidance no longer supports the concept of classifying these costs as extraordinary. Therefore, these expenses are classified as a component of the change in net assets arising from continuing operations and included in total operating expenses in the statement of activities. It will be important for institutions to track these expenses to ensure proper presentation in the financial statements, whether in the statement of activities or the related notes.
Due to the unprecedented impact of the coronavirus on an entity’s financial statements, we would recommend consulting with your advisors to understand many other related factors that may be impacted by the accounting treatments discussed above. These include:
We are in a state of constant change as the world continues to adapt to the impact of COVID-19, and we are committed to ensuring that you have access to the information you need to address your institution’s needs. As we continue to field questions, we will continue to post updates to Baker Tilly’s Coronavirus Preparedness Resource Center and the Higher Education Coronavirus Preparedness sit. If you have questions that are not addressed, please reach out to David Capitano, higher education practice leader.